Many seniors who collect Social Security benefits continue working past retirement age in order to supplement their income. However, working while collecting Social Security can impact the amount of benefits a person receives if they earn over certain limits. There are a few key factors that determine how much a 70 year old can earn without reducing their Social Security payments.
Overview of Social Security Earnings Limits
Social Security applies two different earnings limits based on a beneficiary’s age:
- The retirement earnings test limit applies to beneficiaries under full retirement age (FRA). In 2023, this limit is $21,240.
- The higher retirement earnings limit applies in the year a beneficiary reaches FRA. For 2023, this limit is $56,520.
If a Social Security beneficiary under FRA earns over the lower limit, $1 in benefits will be withheld for every $2 in earnings above the limit. For those earning over the higher limit in the year they reach FRA, $1 in benefits is withheld for every $3 earned above the limit.
The Retirement Earnings Test
The retirement earnings test applies to anyone collecting Social Security payments who is under their full retirement age (FRA). For anyone born in 1953 or later, the FRA is 66 years plus some number of months. So for example, if you were born in 1956, your full retirement age is 66 and 8 months. The retirement earnings limit does not apply beginning in the month a beneficiary reaches full retirement age.
In 2023, the lower retirement earnings limit is $21,240. If a beneficiary under FRA earns above this amount, $1 in benefits will be deducted for every $2 in earnings above the limit. For example, if a 69 year old earns $30,000 in 2023, their benefits would be reduced by $4,380 [($30,000 – $21,240) / 2 = $4,380].
The Higher Earnings Limit in the Year of Reaching FRA
A higher earnings limit applies in the calendar year that a beneficiary reaches full retirement age. In 2023, this limit is $56,520.
If a beneficiary exceeds the higher earnings limit in the months leading up to their full retirement age, $1 in benefits will be deducted for every $3 earned over the limit. For example, if a beneficiary reaches FRA in August 2023, the higher limit would apply January through July. If they earned $65,000 during that period, benefits would be reduced by $2,826 [($65,000 – $56,520) / 3 = $2,826].
How Earnings Limits are Applied
It’s important to understand how the earnings limits are applied when calculating benefit reductions:
- The limits apply to gross wages from employment or self-employment.
- Limits apply on a monthly basis. Benefits can be withheld even if total earnings for the year don’t exceed the annual limit.
- Amounts are withheld beginning with the first $1 earned over the monthly limit, not after the annual limit is reached.
- One higher annual limit applies regardless of how many months remain until FRA is reached.
- Limits only apply to earnings beginning the month a beneficiary starts receiving benefits, not before.
These provisions allow Social Security to adjust benefits appropriately based on a beneficiary’s monthly earnings before and after reaching FRA in a given year.
How Benefits Are Adjusted
In the past, wages above the earnings limits simply resulted in no Social Security benefits being paid for certain months during the year. However, two changes were made to the Social Security Act that altered how benefits are recalculated:
- 1977 – Implemented the “adjustment of reduction factor.” This reduced benefits by $1 for every $2 earned above the lower limit for beneficiaries under FRA.
- 2000 – Established the higher earnings limit in the year FRA is reached, reducing benefits by $1 for every $3 earned above that limit.
So instead of just withholding benefits month-to-month when earnings exceed the limits, the SSA now does an end-of-year recomputation to adjust benefits based on total earnings. This means benefits may be reduced across the entire year, beyond just the months when earnings were too high.
Example of Social Security Earnings Test
Here’s an example of how the earnings limits are applied:
- Beneficiary is 68 and receives $1,500 per month in Social Security payments (or $18,000 for the year)
- The beneficiary earns $24,000 from working in 2023
- Since earnings are above the $21,240 limit, benefits will be reduced
- $24,000 – $21,240 = $2,760
- $2,760 / 2 = $1,380
- $1,380 is the amount that is withheld from total benefits
- So the beneficiary’s annual adjusted benefit is $18,000 – $1,380 = $16,620
This adjustment calculation brings total income from working and Social Security benefits ($24,000 + $16,620) to $40,620. This is under the $44,520 maximum that still allows 50% of benefits. So while benefits are reduced, this method prevents excess earnings from making someone ineligible for Social Security payments entirely.
How Benefits Are Restored
In the past, once benefits were withheld due to excess earnings, the higher amount was not restored later. However, a change was also made to the Social Security Act to account for this:
- 1977 – Implemented the “adjustment of reduction factor” which enabled benefits to be recalculated and restored based on total earnings over the full year.
Under this provision, the SSA does a recomputation at the end of the tax year based on total annual earnings. If it’s found that too much was withheld because monthly earnings fluctuated above and below the limits, an adjustment is made.
Using the previous example, if the beneficiary earned $5,000 a month January through June (total $30,000), then zero July through December, the prior calculation would have withheld too much. The end-of-year adjustment would calculate the excess earnings as $30,000 – $21,240 = $8,760. $8,760 / 2 = $4,380 benefit reduction. So the beneficiary would receive the full monthly benefit for July through December, and an additional lump sum payment of $9,620 ($14,000 previously withheld minus $4,380 actual reduction) to restore full annual benefits.
How Working Affects Social Security Taxation
It’s also important to understand how earnings impact the taxability of Social Security benefits. Up to 85% of benefit income can become taxable if a recipient’s combined income exceeds certain thresholds:
- For single filers, if combined income is $25,000 to $34,000, up to 50% of benefits are taxable. Over $34,000, up to 85% are taxable.
- For joint filers, if combined income is $32,000 to $44,000, up to 50% of benefits are taxable. Over $44,000, up to 85% are taxable.
Combined income = AGI + Non-Taxable Interest + 50% of Social Security Benefits
So higher earnings from working will drive up the portion of benefits that get taxed via the AGI component of combined income. Retirees should be aware of this tax consideration when deciding how much to earn from working.
Strategies to Limit Earnings
For Social Security beneficiaries under FRA, there are some strategies that can be used to limit earnings and avoid benefit reductions:
- Track earnings monthly to avoid going over the monthly limits that trigger reductions
- Defer additional income like bonuses or consulting until after reaching FRA
- Draw more income from sources like investments, retirement plans, or rental properties instead of active wages
- Shift the type of work done to lower paying jobs
- Limit hours worked to keep wages below the limits
The key is monitoring earnings regularly and making adjustments if needed to keep total income within the limits. Some additional planning around what types of income are earned can help avoid benefit reductions.
Special Earnings Rule for Working After Claiming Benefits
There is a special earnings rule that applies in the first year after a beneficiary claims Social Security, usually at age 62. This rule allows recipients to receive a full Social Security check for any whole month they earn under a certain limit, regardless of total earnings for the year. In 2023, this special monthly limit is $2,230.
For example, if a beneficiary claims Social Security at age 62 on July 1, 2023 and earns $1,500 each month for the remainder of the year, they would receive full benefits July through December. Even though total earnings for the year exceed the annual limit, they stayed under the special monthly limit for those first 6 months after claiming.
This can provide flexibility to earn a bit more than normal in the months after first claiming benefits. But after the first year, the normal yearly earnings limits would apply again.
How Work Effects Benefits if Claimed Before or After FRA
Whether Social Security benefits are claimed before or after FRA also impacts how earnings from work affect payment amounts:
- Claiming before FRA – Benefits are permanently reduced by a certain percentage for each month claimed early. Additional earnings from work compound this reduction per the earnings limit rules.
- Claiming after FRA – Delayed retirement credits accumulate each month benefits are delayed, up to age 70. Working over the earnings limit decreases benefits in the short term, but does not impact the permanently higher benefit amount.
This is an important difference. If benefits are claimed before FRA, reducing them further by working can lock in a lower payment for life. If claimed after FRA, benefits can be restored to the full higher amount after any withholding due to earnings.
How Spousal and Survivor Benefits are Impacted
Spousal and survivor benefits claimed against a worker’s record can also be impacted by earnings limits prior to FRA:
- A spouse drawing benefits based on the working record of a living partner under FRA is subject to the earnings test.
- A widow(er) survivor beneficiary under FRA claiming benefits on the record of a deceased spouse is subject to the earnings test.
However, these dependent benefits are only reduced based on the dependent’s own earnings, not the earnings of the primary worker. For example, a 68 year old survivor beneficiary earning $30,000 would have their benefits reduced, even if the deceased spouse was over FRA when they passed.
Key Points
To summarize the key points:
- Social Security applies earnings limits for beneficiaries under FRA: $21,240 for those 62-66, $56,520 in the year FRA is reached
- Going over these limits will reduce benefits by $1 for every $2 or $3 earned over, depending on age
- SSA does a recomputation at year end to adjust benefits based on total earnings
- Benefits can be restored if earnings fluctuate and limits are not exceeded over full year
- Claiming before FRA causes benefit reductions that compound if still working
- Spousal/survivor benefits are reduced based on dependent’s earnings, not primary worker
Conclusion
Understanding Social Security earnings limits is crucial for seniors collecting benefits and earning wages at the same time. Keeping monthly earnings below the limits, planning the type of income earned, and timing claims carefully around FRA are key strategies to maximize total income from both working and Social Security. Monitoring earnings regularly and making adjustments as needed can help prevent permanent reduction in monthly payments.